CPA Not an “Expert” in Financial Fraud Case

A jury convicted the Defendant in Indiana of 15 counts of wire fraud, four counts of money laundering, and one count of securities fraud for his participation in a fraudulent investment scheme.

In 2009, a self-described financial advisor began creating financial investment business entities and soliciting startup capital from family and friends. He directed individuals to transfer their retirement funds from their personal accounts into self-directed IRAs. Each of the individuals executed promissory notes, providing for various rates of return at various maturity dates. Defendant told his investors that he intended to secure their returns through investments in companies such as Coca-Cola, ExxonMobil, Wells Fargo, and Procter & Gamble. The documents the investors signed, however, didn’t specify particular investments that would be made and reserved Defendant’s discretion to invest where he thought best.

Each of the investors transferred their funds to the specific IRA, per Defendant’s instruction, and he then deposited the funds into various bank accounts that he controlled under the names of the various entities. However, none of that money was ever invested in any of the companies Defendant listed in his advertising materials. He used some of the money to open an E*Trade stock-trading account, but eventually lost all that money. The remainder of the investors’ capital either remained in Defendant-controlled bank accounts or was placed into an account owned by his wife’s management consulting business, which she ran out of their family home.

Defendant used most of these funds to pay for personal expenses including home mortgage payments, automobiles, and home landscaping. At trial, he claimed that these amounts were business expenses for his wife’s company and that the funds from his other accounts were investments made with a return expected later. The government argued he was simply using the investors’ capital to pay for his lifestyle. At trial, a jury found Defendant guilty on all counts.

On appeal, he argued that the court erred in denying his request to label his certified public accountant an “expert” in front of the jury. Defendant submitted an expert report from the CPA, which the government sought to bar. The district court issued a written order holding that the CPA’s proposed testimony, including his opinion testimony, was admissible, but prohibited the parties from referring to the CPA as an “expert” during trial. The Defendant argued this ruling constituted reversible error.

Senior Circuit Judge William Joseph Bauer of the Seventh Circuit Court of Appeals wrote that the Court found no error in the court’s analysis under Rule 702. The court’s pretrial order on this issue properly applied the standards for Rule 702 set forth in Kumho Tire Co and Daubert, he said. Applying those standards, the trial court found that it was not appropriate to refer to the CPA as an “expert witness.” As a practical matter, however, the court held that the CPA’s proposed testimony was admissible, and even stated that Defendant was permitted to refer to CPA’s testimony as “opinion testimony.”

Because the trial court didn’t bar any of CPA’s opinions or proposed testimony, Defendant’s only remaining argument was that the court abused its discretion by prohibiting him from referring to CPA as an “expert” in front of the jury. The trial court reasoned that such a label could confuse the jury and inappropriately elevate the status of CPA’s testimony in the jury’s eyes. It also noted that this is the standard practice for all cases in that court and is typical practice in the district.

Judge Bauer found no abuse of discretion in the court’s reasoning. This wasn’t a situation where the court allowed the government to use the “expert witness” label, but refused Defendant that same opportunity. The Court explained that there’s a danger in every case that upon hearing the title “expert”—especially if it comes from the court itself—a jury may assign inappropriate weight and credibility to that witness’s testimony in comparison to that of others. “To combat that danger, courts instruct juries, as the court did in this case, that witnesses who testify based on specialized knowledge are to be judged the same as any other witness,” Judge Bauer held. Precluding the use of the “expert” title is simply another safeguard against that danger.

Nonetheless, even if the court erred in denying use of the “expert” label, the Seventh Circuit held that it was harmless, given that the court allowed Defendant to establish CPA’s credentials and elicit his opinions in front of the jury. Defendant couldn’t point to any evidence or testimony that the court’s ruling prevented him from eliciting, Judge Bauer emphasized. Defendant argued that the court’s order created “confusion among the parties as to the scope and limits of CPA’s testimony,” which ultimately hindered his ability to fully elicit CPA’s opinions. But upon review, the appellate court found that the order provided little room for any such confusion.

The trial court’s order noted that the CPA’s report contained two opinions: that Defendant operated closely-held businesses, and that the payment of personal expenses through those businesses wasn’t atypical; and that he operated profitable businesses, in which he deposited investors’ funds. The order then clearly stated that the CPA’s proposed testimony was admissible and permitted the parties to refer to it as opinion testimony. There was nothing in the order to suggest that the CPA would be prevented from offering any opinions or proposed testimony, nor did Defendant contend that the court prevented him from doing so with any rulings at trial.

Thus, Defendant was free to elicit CPA’s opinions, and any confusion he experienced couldn’t be attributed to an error or abuse of discretion by the court. There was no reversible error in the court’s rulings regarding CPA, and the conviction was affirmed.

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